• Luxury Licensees Told: Toe the Line

    Keeping a luxury brand out of downmarket distribution channels has just become a little bit easier, following the ECJ's recent ruling in Copad SA v Christian Dior Couture SA et al. (Case C-59/08). Licensees violating license terms by selling outside approved distribution channels can now find themselves at the wrong end of a trademark infringement action by the licensor.

    The "aura of luxury"

    In Copad, Dior had licensed a French company ("SIL") to manufacture and sell luxury corsetry bearing the CHRISTIAN DIOR mark. The license contained an express term prohibiting the sale of the goods to inter alia discount stores, "in order to maintain the repute and prestige of the trade mark."

    In breach of the license, SIL sold CHRISTIAN DIOR-branded products to Copad, who operated discount stores. Dior sued SIL and Copad and, in a reference to the ECJ, the French Court asked for guidance on whether sales outside a permitted distribution network in breach of a license constituted breach of a term relating to "the quality of the goods manufactured" such that the licensor could sue the licensee for infringement under Article 8 (2) of the Harmonisation Directive.

    The Court ruled that it could. Where luxury goods were concerned, quality was as much concerned with aura and prestige as with the material characteristics of the goods. Maintenance of a selective distribution network could help enhance or maintain the aura of luxury around such goods and thereby contribute to upholding quality. Selling outside that network could undermine that process and ultimately impair quality in the sense of undermining the brand's allure and prestige.

    Consequently, where a licensee of luxury goods sells outside a permitted distribution network as set out in the license, he is effectively putting goods bearing the mark on the market without the consent of the licensor and brand owner. As such, the Court held that such use could infringe.

    Comment

    This decision immediately caught the eye of luxury brand owners and their licensees.

    For the brand owners, it represents tighter control over their distribution networks and tougher sanctions on licensees in breach, who can now be sued for trademark infringement as well as breach of contract.

    For the licensees, Copad represents an increased risk when entering licensing arrangements that impose distribution restrictions. Dior's licensee sold outside its permitted network due to financial difficulties, after having unsuccessfully sought a waiver of the relevant term by Dior. While SIL should have been on notice that Dior would object, that does not change the fact that economic circumstances can put a licensee's own commercial interests at odds with those of the brand owner/licensor when a license contains restrictions on distribution.

    Not every breach of a license term relating to distribution networks, however, will necessarily take a licensee outside the scope of the license such as to make him liable for trademark infringement. The brand owner will first need to show that the brand in question has the "aura of luxury" needed to justify equating a selective distribution network with the maintenance of quality. In the case of some famous brands, this may be a given, but in other cases a licensor will need evidence, and his case could be undermined if the licensee can show that the licensor has failed to prevent sales outside the distribution network by others in the past. The need for enforcement for luxury brand owners therefore remains strong.

    Interestingly, the Court remarked that whether the sale of goods outside a permitted distribution network could impair a brand's aura of luxury was a question of fact, dependent on issues like the nature of the goods, how many were sold, how often, the nature of the other goods sold by the unauthorised retailer and the marketing methods employed. This is curious since Article 8 (2) only refers to breach of a provision relating to quality, not to a breach that actually impairs quality. Whether licensees use this successfully to evade liability in future cases remains to be seen.

    For now, though, this is an important victory for luxury brand owners. It underscores the importance of careful license drafting and, for licensees, knowing and adhering to the terms of the license.